Economic growth is expected to be disappointing in the coming months, and the case for a cut in interest rates is growing, a report said today.

Economic growth is expected to be disappointing in the coming months, and the case for a cut in interest rates is growing, a report said today.

Accountancy firm BDO Stoy Hayward said its output index, which relates closely to GDP movements a quarter ahead, reached its lowest level since October last month, falling by 0.5 points to 99.2.

The index implies economic growth of just 1.7 per cent in the first quarter of 2003, reflecting the depressed state of business spending, the impact of the strong pound, and the weak state of world trade on production.

BDO added that despite the lure of Christmas shopping, consumers' willingness to spend had fallen sharply in recent weeks.

The firm added evidence that the property market was cooling - suggesting that inflation would also fall - meant the Bank of England should soon have more scope to cut interest rates to strengthen the economy.

However BDO predicted it would be February before rates could be reduced, and is pencilling in a quarter point reduction from the current four per cent.

Chris Grove, partner at BDO Stoy Hayward said: "In recent months sustained Government and consumer spending have kept the economy buoyant, but with the outlook for consumer spending weakening in 2003 the economy is under increasing pressure.

"The Bank of England may hold rates again when it meets this week, but as the outlook for growth deteriorates, the case for further interest rate cuts grows."

Douglas McWilliams, chief executive of the centre of economics and business research which compiled the research, said: "While bargain-hunters are enjoying larger price cuts than usual in the high street sales this month, the Bank of England can no longer rely on strong growth in consumer spending to prop up the ailing economy, and must take decisive action soon to buoy optimism."

However, interest rates look set to remain frozen at four per cent for the 14th month in a row this week.

Rates have been held at the near-40-year low since November 2001 as the Bank of England balanced a red-hot housing market and booming consumer spending against a fragile global economy and under-pressure manufacturers.

However the economic landscape has changed over the past months.

Spending has cooled, the housing market is seen at risk of a crash, while the high oil price is putting margin pressure on industry.

The Bank has so far been reluctant to lower interest rates in case it fuels house prices further, making a hard landing more likely.

Higher property values have also pushed inflation up - and economists say rising house prices look set to push underlying inflation to more than three per cent over the coming months.

Evidence also points to a poor month for retailers at least during the pre-Christmas period.